OVERVIEW
The Payments System Board and the Reserve
Bank have a clear legislative mandate to promote
competition, efficiency and stability in Australia’s
payments system and the stability of the systems
used to clear and settle transactions in financial
instruments. The Government has given the Bank
explicit powers under the Payment Systems
(Regulation) Act 1998 and the Corporations Act 2001
to carry out these responsibilities, which the
Board oversees.
The Board’s preferred approach to carrying
out its mandate has been to work with
industry participants in order to understand
the nature of the systems they operate
and the business pressures they face. It has
complemented this with analysis of the price
incentives facing both the providers of
payment, clearing and settlement services
and their ultimate customers – consumers,
businesses and financial market participants –
and by comparisons with developments in
other countries.
This approach has assisted the Board in
identifying areas where there is scope to improve
efficiency by allowing competitive forces to
operate more effectively and to redesign systems
to make them safer and more efficient. Where the
industry has been receptive, the Bank has worked
with participants to explain its analysis and
conclusions and to explore with them ways in
which reforms might be voluntarily introduced.
This is consistent with the co-regulatory
approach envisaged by the Government under
which the Bank would use its powers when other
avenues for reform had been exhausted.
Over recent years much of the Board’s focus has
been on the retail payments sector. This work
stems from recommendations of the Financial
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System Inquiry (the Wallis Inquiry) that led to the
establishment of the Board in 1998 and the
Board’s early investigations along the lines
described above. The early projects focused on
gathering information. The Board’s first major
research initiative was on card payment systems
in Australia and was undertaken jointly
with the Australian Competition and Consumer
Commission (ACCC). Data on the costs of these
systems in Australia were collected from financial
institutions and then analysed and reported in
Debit and credit card schemes in Australia, published
in October 2000. Similarly, the Board undertook a
project looking at the use of direct debits in
Australia. More recently, the Bank has launched a
new retail payments statistics collection, the first
instalment of which was published in 2003.
These information-gathering exercises have
allowed the Board to form views about the
operation of the payments system in Australia
and to look at reform proposals to address its
concerns. Following the preferred approach, the
Board and the Bank have sought to work with
industry participants to achieve a more
competitive and efficient payments system. As a
result of the work on debit card systems,
participants in the ATM network and the debit
card system are pursuing voluntary reform and
the Bank has encouraged and facilitated that
process. In the case of ATMs the focus has been
on eliminating interchange fees (fees paid
between ATM owners and card issuers) which are
unrelated to costs, and fees to cardholders which
are not transparent at the time of a transaction.
They would be replaced by direct charges made
clear to cardholders before they withdraw cash.
The Board strongly supports this initiative,
which will introduce competition into the
cash dispensing market. Overseas experience
suggests that most cardholders will find ways to
pay no fees or only limited fees. While operators
of some machines may levy higher charges, there
are likely to be ATMs in many locations where they
were not previously available.
Industry participants have also accepted the
Board’s view that there is no justification for the
current interchange arrangements for debit cards
and they have proposed to the ACCC that they be
reduced to zero. The ACCC has not been
convinced that such a move would be in the public
interest unless there is also liberalisation of
access to the debit card system that would
increase competition in the provision of services
to cardholders and merchants. The ACCC has
invited the industry to address both questions
simultaneously. The Board encourages the
industry to undertake this work, with a view to
increasing competition and efficiency in the debit
card system.
On the other hand, the Bank has had to use its
powers to achieve reform of credit card schemes.
It became clear in early 2001 that a voluntary
approach to dealing with reform of credit card
schemes was not feasible and the Board initiated
a formal regulatory process under the Payment
Systems (Regulation) Act 1998. This culminated in
August 2002 when the Board determined
standards that abolished the “no surcharge” rule
applied by the international credit card schemes
and set a cost-based benchmark that is expected
to reduce interchange fees in credit card schemes
substantially. It also foreshadowed an access
regime that provides for non-discriminatory
treatment by the card schemes of specialist
organisations supervised by the Australian
Prudential Regulation Authority that wish
to participate in the credit card business.
The Board expects that these reforms, which are
being introduced over the course of 2003, will
improve competition in the Australian payments
system, increase efficiency and reduce costs
currently borne by merchants and passed on to
all consumers in the form of higher prices for
goods and services.
Shortly after the reforms were announced,
MasterCard International and Visa International
initiated legal action seeking to have them
overturned on procedural and jurisdictional
grounds. The case was heard during May and
June 2003 and, at the time of writing, the judge
was considering his decision.
On the safety and stability side, the Board has
encouraged the reduction of risk in foreign
exchange settlements through the establishment
of the Continuous Linked Settlement (CLS) Bank.
CLS became operational in September 2002 and by
early 2003 most banks active in the Australian
dollar foreign exchange market were participating
in its settlement arrangements.
In May 2003 the Board finalised financial
stability standards for central counterparties
and securities settlement systems that clear
and settle transactions in debt instruments,
equities and derivatives. The standards drew on
international work in this area and benefited from
consultation with financial market participants.
They focus on the need for clearing and
settlement facilities to control the risks to which
they are necessarily exposed in carrying out their
roles. The standards apply to facilities operated by
the Australian Stock Exchange and the Sydney
Futures Exchange. The Board’s assessments of
their compliance with the standards will be
included in next year’s Annual Report.
17 September 2003
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